Hypothecation is a term used in the context of financial transactions, particularly in lending and securities trading. It refers to the practice of using an asset, such as securities or property, as collateral for a loan without transferring ownership of the asset.

When a borrower hypothecates an asset, they retain ownership but pledge it as security to the lender. This provides assurance to the lender that if the borrower defaults on the loan, the lender has the right to seize and sell the asset to recover the outstanding debt.

Hypothecation is commonly used in margin trading, where investors borrow funds from a broker to purchase securities. The securities themselves serve as collateral for the loan. In this case, the broker may have the right to sell the securities if the investor fails to meet margin requirements or repay the loan.

Hypothecation allows borrowers to obtain financing while maintaining possession and use of the pledged asset. It provides lenders with a form of security and reduces the risk associated with lending. However, it's important for borrowers to understand the terms and conditions of hypothecation agreements, as failure to fulfill obligations can result in the loss of the pledged asset.

Hypothecation is a financial arrangement where a borrower pledges an asset as collateral to secure a loan, without transferring ownership or possession of the asset to the lender. This is commonly used in mortgage loans and car loans, where the property or vehicle serves as collateral.

The borrower retains ownership and can use the asset, but the lender has a legal claim on it. If the borrower defaults on the loan, the lender can seize the asset to recover the owed amount. Hypothecation reduces the lender's risk, often resulting in lower interest rates for the borrower. It is a critical mechanism in secured lending, balancing the interests of both parties by providing security for the lender and access to funds for the borrower.